U.S. Senator Schumer jumps into dark pool debate before SEC meeting

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By Jonathan Spicer
NEW YORK, Oct 20 (Reuters) – U.S. Senator Charles Schumer on Tuesday jumped in to the debate over anonymous trading venues known as dark pools, calling for tough new regulations a day before the U.S. Securities and Exchange Commission meets to consider new rules. Schumer, among the most vocal of lawmakers pressing for market structure reform, urged in a letter to SEC Chairman Mary Schapiro that the regulator adopt some of the most robust measures now on the table, and called for a new market-wide monitor.

He said the growth of dark pools, which now number more than 40, risks undermining fair and transparent markets, and that regulation has not kept pace. The private venues are used primarily to trade large blocks of stock, and have proliferated this decade as the marketplace went electronic.

“We want to keep them in existence … but we want a much more level playing field, which is what we don’t have right now,” Schumer said on a media conference call, adding the fragmented market “compromises the ability of regulators to monitor and enforce such abuses as front running and market manipulation…”

Dark pools, the largest of which are run by banks such as Goldman Sachs and Credit Suisse, account for an estimated 10 to 15 percent of overall U.S. equity volume.

The SEC meets Wednesday to consider proposals for changes that are expected to shed more light on the venues, including requiring them to display more quotes and publicly reveal more data on volumes.

The industry also expects more clarity on whether actionable indications of interest, or IOIs, which dark pools and exchanges use to communicate, should be treated as quotes.

Schumer said all actionable IOIs should be treated as quotes, which would effectively kill them, and that the threshold beyond which dark pools must display quotes should be dropped from 5 percent to 1 percent.

He also called on the SEC to consider real-time reporting of dark pool trades to the consolidated tape — a measure that many expect, but that some warn could hamper institutions’ ability to execute big, complicated orders.

Schumer made a splash this summer when he called for the elimination of so-called flash orders, which some exchanges sent to specific market players before routing them to the wider market. The SEC last month proposed to ban flashes.

ANTICIPATING NEW RULES
NYSE Euronext, which runs the New York Stock Exchange and participated in Schumer’s conference call, on Tuesday said it would begin next month offering a means by which dark pools and broker-dealers could report trading.

The service — which effectively dusts off a so-called trade-reporting facility, or TRF, that has been mostly dormant for a year — is backed by units of Goldman, Barclays PLC, UBS AG, Knight Capital, and by Getco, the big high-frequency market-maker.

All U.S. off-exchange trading is now printed on Nasdaq OMX’s TRF, which accounts for some 35 percent of overall volume. NYSE’s rival TRF would standardize volume reporting, print it daily on its website — and represents a way for the exchange to facilitate any new SEC rules.

Schumer said dark pools should face more robust start-up regulations, and should share the costs of providing market-wide surveillance — an argument long held by NYSE Euronext CEO Duncan Niederauer, who was also on the call.

Schumer did not identify which body should act as monitor.

U.S. market surveillance is now shared by in-house teams at the trading venues, as well as the Financial Industry Regulatory Authority (FINRA). The SEC is the umbrella regulator and police for stock and options markets.